General Manuel Noriega remained at large and skirmishing continued last night, as an ugly and protracted guerrilla war and a potential hostage crisis threatened President's Bush's hopes of a brisk Christmas victory in America's back yard. President Bush claimed yesterday that 'key military objectives have been achieved' by the 24,000 US troops, whose Operation Just Cause invasion replaced the dictatorship of Gen Noriega with a constitutionally elected civilian government.

But 12 hours after the US operation began, Gen Noriega's armed militia were still setting up roadblocks and stopping cars in the city's main financial district, while the new civilian government was kept under guard by the US military, which said it was too risky for them to appear in public.

The Soviet Union swiftly condemned the invasion, saying it was a blow to growing warmth in US-Soviet relations. But Mrs Thatcher backed the 'courageous' US action.

While Democrats in Congress gave bipartisan support to the President's decision to launch the biggest US military operation since the Vietnam War, Moscow expressed 'deep concern' for what it dubbed gun-boat diplomacy which violated the UN Charter.

'The Soviet Union supports democracy by staying out of countries and thus permitting democracy to succeed. In this one, and very unique instance, the US did it by going in to assist a democratically elected government against a dictator', the Secretary of State, Mr James Baker, claimed.

Eleven US troops died and 59 were unjured in an operation which has seen 'at least 60 dead civilians,' up to 1,000 wounded and an unknown number of Panamanian military casualties. The fighting began with US parachute assaults at 1 am, and a tank-led assault on the headquarters of the Panama Defence Forces caused widespread damage in the heart of the city. The headquarters was burned to the ground.

While all Panamanian military posts were reported secured by the Pentagon yesterday, and US electronic warfare teams jammed most Panamanian-controlled TV and radio broadcasts, at least one central radio station remained in the hands of Noriega supporters, rallying the militia to resist the US invasion, and claiming to hold 40 American hostages.

There was no immediate confirmation of this hostages claim, although there was no contact with the CBS and ABC TV correspondents, who were said to be among them.

Tweleve hostages, including journalists from Reuters and the New York Times, were seized in the early hours yesterday in the Marriott Hotel, before being released by pro-Noriega armed civilians, who urged them to 'tell the story of the American invasion'.

General Colin Powell, chairman of the Joint Chiefs of Staff, said: 'The operation is not over yet. Mr Noriega is in hiding. We will chase him and we will find him. We have decapitated him from the leadership of his country. He is not running anything. We own all the bases. We have cut off the head of that Government,' Gen Powell added. He went on to acknowledge that 'having him loose does raise the potential that he might make more mischief, take to the hills and be very hard to find.'

President Bush, in a dawn TV address yesterday, said that his objectives were to protect American lives, to restore democracy and an elected government to Panama , to bring 'the indicted drug trafficker,' Gen Noriega to American justice, and 'to ensure the integrity of the Panama Canal treaties'.

'I will continue to seek solutions to the problems of this region through dialogue and multilateral diplomacy', the President said, as the battle raged 1500 miles to the south.

The President decided upon military intervention on Sunday, after a weekend of harassment of US citizens, and a year of humiliation at Noriega's hands. The widespread accusations of incompetence after a botched attempt to support the anti-Noriega coup in October had clearly stung the Bush Administration.

According to the Soviet Tass news agency, which was in contact with Noriega supporters, the US strike failed to arrest any of his leaders.

The fighting, which had died down during the night, flared up again as dawn came, and flights of US Cobra gunships began to fly over Panama City. Shooting, occasional explosions and the crump of mortar bombs were heard intermittently throughout the day, from scattered locations including the inner city, Fort Amador and San Miguelito.

One witness to the assault on the Panamanian Defence Forces headquarters telephoned the Cable News Network to claim: 'They are not only bombing the bases, they are bombing the surroundings and many civilians are being killed.'

The canal, closed for the first time in its 75-year history, will reopen for daytime operations today.

'Manual Noriega, who was yesterday's Panama 's maximum leader, is today a hunted fugitive,' Mr Baker said. He stressed that the US would abide by the Canal Treaty timetable to hand over the canal to Panamanian rule.

'Give it a chance. Democracy will take over in Panama ', Mr Baker insisted, claiming that the US had acted in accordance with international law.

Intelligence reports said that Gen Noriega was planning further actions against the 35,000 US civilians living in Panama , Mr Baker claimed.

The Speaker of the House, Mr Tom Foley, accused Gen Noriega of 'reckless incitement,' but added: 'American forces are in the field, and casualties are being taken. This is not the proper time for a lot of complicated debate.'

'It has been some years since General Noriega, the fugitive, has been seen living in the jungle. He is used to a different kind of lifestyle and I'm not sure he would be up to being chased around the country by Army Rangers, special forces and light infantry units,' Gen Powell said.